Cover IMF Working Papers
Monetary Policy Rules for Financially Vulnerable Economies
Author:
Mr. Eduardo Morónnull

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Mr. Diego Winkelriednull

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Series:
IMF Working Papers
Volume/Issue:
Volume 2003: Issue 039
Language:
English
Publication Date:
01 Feb 2003
DOI:
https://doi.org/10.5089/9781451845853.001
ISBN:
9781451845853
ISSN:
1018-5941
Pages:
36
Keywords:
WP; inflation targeting; monetary policy; risk premium; Liability Dollarization; Monetary Policy Rules; Latin America; vulnerable economy; exchange rate regime; regime case; nominal exchange rate; dollarized economy; robust economy; exchange rate fluctuation; Real exchange rates; Return on investment; Exchange rates; Exchange rate arrangements; Exchange rate flexibility; Australia and New Zealand
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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One distinguishable characteristic of emerging market economies is that they are not financially robust. These economies are incapable of smoothing out large external shocks, as sudden capital outflows imply large and abrupt swings in the real exchange rate. Using a small open-economy model, this paper examines alternative monetary policy rules for economies with different degrees of liability dollarization. The paper answers the question of how efficient it is to use inflation targeting under high liability dollarization. Our findings suggest that it might be optimal to follow a nonlinear policy rule that defends the real exchange rate in a financially vulnerable economy.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2003: Issue 039